UPDATE 2-Turkey trims growth outlook as elections loom

Tuesday, 9 Oct 2012 | 7:06 AM ET

SHARES

* Growth seen at 3.2 pct this year, 4 pct next

* Outlook seen as prudent by analysts

* Progress seen on c/a deficit

(Adds analyst comments, details)

By Ozge Ozbilgin

ANKARA, Oct 9 (Reuters) - Turkey cut its growth forecasts for this year and next on Tuesday and said budget deficits would be wider than previously thought, falling largely into line with independent economists as it moves into an election cycle.

Announcing the government's medium-term programme for 2012-2015, Deputy Prime Minister Ali Babacan said the economy was expected to grow 3.2 percent this year, below a previous forecast of 4 percent. Next year's growth was seen at 4 percent, down from a previous forecast of 5 percent.

Turkey was Europe's fast-growing economy last year, with growth of 8.5 percent, but weaker domestic demand has taken its toll this year despite strong exports, and policy makers have been trying to steer the economy softly back to earth.

The medium-term framework suggested that Prime Minister Tayyip Erdogan, who has said he would like to see real interest rates of zero percent to stimulate growth, had ultimately sided with some of the government's more cautious technocrats.

Erdogan, who has overseen a near tripling of per capita GDP in Turkey during almost a decade in power, has made strong growth a priority and is keen to maintain that reputation as elections loom.

"This programme covers the next three years when Turkey faces local, presidential and parliamentary elections, plus a likely referendum on constitutional reform," said Timothy Ash, head of emerging markets research at Standard Bank.

"In my mind, given the backdrop of elections, this looks like a prudent and very credible set of targets," he said.

The budget deficit was expected to come in at 2.3 percent of GDP this year, above the government's original 1.5 percent target, and to decrease only marginally next year.

"Considering the three elections in the next three years, we think that the new forecasts appear more realistic. Besides, they are still below the related Maastricht criterion of 3 percent," he said.

The government has announced a range of measures to try to boost revenues in recent weeks including tax hikes on cars, fuel and alcohol after disappointing privatisation receipts and increased infrastructure spending hurt public finances.

DOMESTIC DEMAND STRENGTHENING

Tighter monetary policy in the last quarter of 2011 and the start of 2012 have helped bring down Turkey's high current account deficit and inflation without driving it into a deeper economic downturn.

The central bank, which cut its overnight lending rate for the first time in seven months at its last monthly policy meeting in September, is now trying to cushion the slowdown in economic growth by stimulating domestic demand.

Governor Erdem Basci said last month that he was "slowly loosening the brakes" but was cautious about easing policy too far and widening the current account deficit.

The medium-term programme forecast growth would pick up again next year and accelerate to 5 percent in 2014 and beyond.

"In the last quarter of this year we foresee the contribution of exports to growth declining in relative terms and domestic demand gathering strength," Babacan told a news conference in Ankara.

Exports were seen growing to $187.1 billion by 2015 from $149.5 billion this year, Babacan said, continuing a growth trend which has been fuelled by firms' diversification into new Middle Eastern and African markets to offset weaker demand in the European Union, Turkey's largest trading partner.

The International Monetary Fund (IMF) said on Monday that Turkey was on track to return to its long-term growth path but warned its wide current account deficit left it vulnerable to volatile foreign capital flows.

Babacan said efforts to trim the current account deficit - expected to come in at 7.3 percent of GDP this year - would pay off, with it falling gradually to 6.5 percent by 2015.

He also gave an optimistic outlook for inflation from next year onwards, forecasting it would fall to 5.3 percent in 2013 and 5.0 percent thereafter, down from an anticipated 7.4 percent this year.

"The medium-term economic programme is offering a consistent macro framework, but we think especially for the end of 2013 5.3 percent inflation is pretty optimistic," said Gizem Oztok Altinsac, an economist at Garanti Securities.